WHEN STATE SPONSORED LICENSING IS AGAINST CONSUMER'S INTERESTS

“Occupational licensing can raise quality. It also raises prices, reduces output, and makes the labor market less flexible. Alabama policymakers would be wise to get rid of it.

In the first paper released as part of the Johnson Center at Troy University's Improving Lives in Alabama: A Vision for Economic Freedom and Prosperity—to which I have also contributed—economist Daniel J. Smith reviews the literature on occupational licensing. Contrary to his critics' charges, Dr. Smith is very much a citizen of "the real world." Licensing works against the interests of society by limiting the extent of the market.

That phrase might look familiar. As another economist named Smith—Adam Smith, in this case—famously wrote, "the division of labor is limited by the extent of the market." A large regulatory burden makes it harder for people to start businesses, limits the extent of the market, and ultimately makes us poorer.

…Licensure creates compulsory and unnecessary cartels for licensed services. Adam Smith also made another important point elsewhere in The Wealth of Nations, and it is central to Daniel Smith's argument:

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary." [WN I.x.c.27: 145]

…As Daniel Smith points out in his study, quality control is an important problem. This helps us explain why certification emerges, but it doesn't necessarily justify licensing. Certification happens when an independent evaluator certifies that a product or service meets certain quality standards (the Good Housekeeping Seal of Approval, for example). Licensing, on the other hand, uses the force of government to prevent people from providing certain services.

…. Licensing’s defenders claim that they are there to protect the public, but this can be accomplished with certification. Licensing is unnecessary because certification can provide quality assurance while allowing people who are willing to accept more risk in exchange for lower prices to make that choice, as well.

Competition is a much more powerful quality regulator than many people think. I've heard a story about a barber who was worried when another shop opened across the street advertising $6 haircuts. He responded by hanging a sign reading "WE FIX $6 HAIRCUTS." I don't know if the story is true or not, but it illustrates two important points. First, quality isn't free. Second, a competitive market helps people find the combination of price and quality that they prefer to other feasible options.

Comment

I like this article in Forbes because it helps to clarify the distinction between ‘certification’ in markets and ‘licensing’ from State regulations. [Hat Tip to Art Carden]

Reputation in markets is a quality badge earned by providers of goods and services. Of course, some regulations are necessary (weights and measures, assay inspections, components' quality, and such like, where the State provides the certification independently of those providing the services.

This can cause localised problems when the state unilaterly decides on the measures, as in decimalisation or metrication. An incoming younger generation easily adjusts but the older generation used to the previous measuring system has to change the habits of a lifetime. This is something I experienced with metrication. I have no image in my mind as to the relative size of a milimetre versus a fraction of an inch, or a kilometre compared to a mile, or degrees centigrade verus Fahrenheit, and so on. But across society my problems in these regards are relatively short-term for me, but not for society lasting well into the future.

An early draconian law making it illegal to advertise or sell green grocery fruit or vegetables by pound weight typified the State at its worst even when both sellers and buyers were happy to have the choice. Eventually reason prevailed and individual buyers and sellers could choose which measure - and which currency - they wished to conduct their private business to the personal delight of some elderly purchasers.

When foreign exchange restrictions for currency changes were legally relaxed by allowing individual banks and foriegn exchange shops to decide their own rates there was some early disruptions in the different price rates charged by some sellers compared to others. A Tory MP complained loudly in the media that regulation should be re-introduced by government to stop ‘exploitation’ of consumer ‘ignorance’ - a prime example of the nanny-state mentality prevalent among politicians, including conservatives.

However, after a while, local radio and newspaper publicity of the exchange-rate prices, plus the resultant competition, narrowed the exchange-rate ranges on offer in the High Street. The market eventually addressed and solved the problem without state regulation. I well remember once in Communist Warsaw trying to change sterling pounds for zloty at the state’s official rates. I demurred and walked back to my train. Half-way along the platform the exchange-bureau manager caught up with me and quietly offered me a much better rate for cash pounds. Immediately, I agreed and we exchanged our money at the new, unofficial, rate, and I congratulated him on the lesson for communists of the superiority of markets.

With official, state-issued licences for activities best arranged via markets, the outcome is always lower supply and higher prices, not subject to competition. In short, Art Carden is absolutely right. The supplier’s reputation in a competitve market is the better regulator of quality than scores of expensive bureaucrats in their plush offices, expensive pensions and other perks.

Congratulations to Art Carden, Daniel Smith and Forbes for this excellent article and, of course, Adam Smith for his observation on the merchants' proclivity for 'conspiring against the public interest', if they can get away with it, by persuading gullible or 'bribable. politicians to legislate to promote their monopoly 'licensing' schemes.